The emergence of shale gas has caused natural gas prices in North America to drop to the lowest levels seen in decades. Shale gas resources elsewhere in the world, however, have not yet been developed to the same extent—creating a sustainable arbitrage opportunity. Given the potential profitability of liquefying surplus North American gas production and exporting it as Liquefied Natural Gas (LNG), a number of companies are now willing to develop capital-intensive natural gas export projects.

LNG exports will help to provide better balance between supply and demand in the market, dampening price volatility in North America, and providing circumstances in which industrial gas investments and feedstock natural gas purchases can be made with greater confidence in long-term natural gas pricing.

As recently as 2007, North America was looking at a significant gas shortage and more than sixty LNG import projects were proposed. Just five years later, the implementation of horizontal drilling and hydraulic fracturing has led North America to a sizable excess of gas supply. The latest figures from the U.S. Energy Information Agency (EIA) indicate that natural gas supply could exceed demand by 2016, enabling North America to become a net exporter of LNG.

The rapid increase in natural gas production has had a substantial impact on gas pricing in North America. While gas prices in North America are not directly correlated to oil prices, up until late 2008, natural gas prices generally matched oil price trends. Since the increase in shale gas production was first identified in Navigant’s groundbreaking North American Natural Gas Supply Assessment in 2008, natural gas prices have headed downwards from $5.00 per million British thermal units (mmBtu) to approximately $2.50 per mmBtu in May 2012. However, although natural gas prices decreased, crude oil prices increased during the same period. While the EIA indicates that long term North American natural gas prices will rise to $4.00 to $6.00 per mmBtu, natural gas will continue to trade at a sizable discount to oil on an energy equivalent basis.

Unlike crude oil, there is not yet a large tradable global market for natural gas and consequently, prices vary across the world. In Asia, prices for major LNG importers closely correlate to oil prices, and LNG is currently priced over $17.00 per mmBtu. In Europe, prices are lower at $12.00 to $14.00 per mmBtu.

For North American producers to benefit from higher global prices they must successfully construct costly and complex LNG facilities and related infrastructure costing billions of dollars.

Assuming a long-term North American natural gas price of $4.00 to $6.00 per mmBtu, liquefaction and shipping costs will add approximately $4.00 per mmBtu. This offers an attractive $3.00 to $5.00 per mmBtu arbitrage opportunity to the $13.00 per mmBtu price currently achievable at Europe’s LNG terminals. The real prize, however, would be realizing LNG exports to Asia. While shipping costs would be higher (due to the much greater distance to Asia than to Europe), the current Asian LNG price of $17 per mmBtu provides the prospect of a much greater arbitrage opportunity.

What are the risks to the current export strategy?

Shale gas production has increased rapidly, offsetting a steady decline in conventional gas production across North America. While more natural gas can be produced from what is largely agreed upon as an “abundant gas resource,” the pace of future development is subject to factors such as changing environmental legislation. Competition for the Asian markets, notably from the large number of Australian-based LNG projects in development, is expected to be fierce. LNG project costs are on the increase, due in part to the considerable number of projects seeking to be developed in a short period of time. Finally, shale gas resources are not exclusive to North America. Europe and Asia both have significant shale gas potential; however, the pace at which shale gas resources will be developed in these regions has yet to become clear.

Overall, North American natural gas exports are a very positive development for both North American and global natural gas markets. In a market of surplus supply, access to large export markets will serve to balance supply and demand, thereby dampening price volatility, increasing natural gas prices moderately, and, over the long-term, providing a sustainable natural gas market in North America—the stability of supply and price needed by North American industrial markets.

In this sense, it would seem that industrial-community opposition to exports based on perception of price impact is short-sighted. Meanwhile, for natural gas consumers in Asia and Europe, North American export projects will provide another competitive supply option. In the long run, companies with experience, fortitude, capital, and a healthy risk appetite may find themselves in the right place and at the right time to capitalize on North American LNG export projects.